Vertical Mergers in Procurement Markets

This paper uses computational methods that reveal ambiguous strategic effects of vertical mergers in a duopoly setting featuring incomplete information about sellers' costs, and differences in sellers' productive capabilities. First, vertical mergers can be jointly unprofitable. Second, the buyer's preferred merger partner is almost always the seller with lower expected costs, and is typically the larger seller. Third, vertical mergers always reduce the unintegrated seller's profits, sometimes dramatically. Finally, vertical mergers can increase total welfare. Some of the results contrast qualitatively with unambiguous findings from models with symmetric sellers, which suggests that caution be used in drawing general inferences from those models